While most of the continent is on some sort of vacation (March break, family holiday) the Japanese and financial markets are in turmoil following the devastation. Japan is waiting for it all to end so they can begin to rebuild, while the financial community is desperately trying to avoid being caught in its own aftershocks.
Sometimes, when you don’t know what to do, it’s best to take some time and DO NOTHING. I did this over the weekend, and yesterday – in fact went for a spin on my bike in the cold to clear my head.
Effectively this crisis has managed to convert what should have been a normal 2% – 3% correction (see previous postings) into something much deeper. According to
Ford Equity Research – below are the success factors for stock picking that were driving the U.S. stocks a couple of weeks ago – before the mayhem.
|Stock Selection FactorsBest: earnings trend, price gain-past 6 months, beta(high), price gain-past 3 months, 1-quarter sales growth.Worst: quality rating, dividend yield, market capitalization, 5-year dividend growth, price/cash flow ratio.Industry Groups
Best: machine tools, oil well drilling, broadcasting, textiles, oil producers.
Worst: bakery products, copper, auto & truck mfg, trucking, home appliances.
It was a momentum market (driven by short-term earnings, mid to smallish sized companies) typical of ocassional frenzies of desperate buying. Most important, the buying during such frenzies is usually in all the wrong areas – past performance driven rather than future performance.
In the first two months of 2011 alone, net sales have totaled $8.92 billion, nearly double last year’s total of $4.46 billion. Total mutual fund assets were $658.4 billion at the end of February 2011, up $16.6 billion from January and $89.6 billion since last February.
Since the best performing funds would’ve been heavily invested in resources, money flowed into them – in turn those fund managers bought more of the same and the ‘bullishness’ was exagerated in the weeks before the correction. Japan will have two affects:
– watch stocks (sectors) that were underperforming before- quality rating (high), dividend yield, market capitalization (big), 5-year dividend growth – get renewed attention now. Interest rates will eventually rise, but there’s a strong likelihood this will be postponed for a couple of months making bonds and income yielding stocks more attractive again.
– also look for ‘baby thrown out with the bathwater’ names – in fact they may be stocks you sold previously and have suddenly been battered into good value once again. I sold Linamar after it ran up earlier in the year, but it’s back to what I consider good value again.
The greatest boom Europe ever experienced was rebuilding Germany and other countries devastated by World War II. Japan is a natural disaster, and although some businesses will certainly suffer in the short term, replenishment will occur and provide a lift to many; either in terms of higher demand (inventory backfill for instance) or higher pricing (shortages, such as lumber).
And then there’s those opportunities presented by panic. If the Chinese are kooky enough to be running imports from Japan (that arrived even before the earthquake/tsunami) by a geiger counter, then Cameco must become a good buy candidate in here somewhere – after all Europe is still powered by primarily nuclear power and this isn’t the first nor will it be the last nuclear incident. Like all technologies, this source of electricity will evolve and improve over millenia.
The global economy is still on the road to recovery, and investment decisions must take the overall ‘road map’ into consideration. There will always be occasional roadblocks and detours like we’re experiencing now (and of course watch for the summer doldrums to hit in a couple of months – seasonality always plays its part) but look towards the ultimate destination and the way to get there will be evident every step of the way.
Invest to Live, Live to Ride